Consequently,
These companies verge becoming profitable:
Today we’re going to talk about profitability. Nevertheless, And in particular a type of business to which we pay more. In addition, more attention to the Zonebourse portfolio management team: companies at the border of profitability. Nevertheless, Those who are on the way to becoming it in the near future. Similarly,
When we talk about business on the verge of becoming profitable. However, we immediately think of many companies, which, a few months back, were in this configuration and it is revealed to be interesting opportunities: Palant, Uber, Spotify, Robinhood…
It should be noted that these companies were already exchanging at very high levels of valuation even before having reached profitability as market expectations were high. Therefore, But they still managed to surprise investors by generating the first euro of profit a few quarters earlier than expected. Similarly, with margins even higher than these companies verge becoming profitable those anticipated by analysts, then making rational investors lie that categorically refuse to touch boxes that exchange turnover 10 times when they have never created value.
But these companies which know a hypercroissance of their income. However, which have a scarable business model and which have not yet reached profitability (let’s give the name “Take off” to this category) are not the only companies in which we are interested here. Meanwhile, Those who have been profitable in the past. Nevertheless, then began to burn cash for, a few years later (after laborious work on costs or a complete rotation of the business), come back from the right side of the force also enter the Scope (let’s give them the name “Recovery”). Nevertheless, Alstom or Tui are good examples.
Why take an interest in these companies?
If we are interested in these companies (“Take Off”. Consequently, “Recovery”), it is for these companies verge becoming profitable a good reason: the information about them is less reliable than for the rest of the companies. These are companies that often create surprise. upwards and downwards, either because they are the first likely to demonstrate the feasibility of a business model in their segment (“Take off” companies), or because they have so disappointed the market that analysts have heavyly lowered their accounting projections (“Recovery” companies).
In any case, estimates about their future margins are relatively vague, and that’s what interests us. Because a difference of 50pdb on a low net margin is an immediate evolution of several tens of % of value. And if the surprise created calls into question all the projections for the next 10 years. then it is quite possible to speak hundreds of % (to understand how to have these orders of size in mind, direction the section “Sensitivity analysis of a DCF model” in these companies verge becoming profitable the Surperform book – Chapter 6).
On the other hand, it should be noted that these companies constitute more risky investments than the average. Many cases of companies have disappointed on income growth. margins levels once the profitability has been reached (zoom, peloton, Etsy …) or that have issued signs that they might never reach profitability (Snap inc).
Before diving into the stockscreener to identify these companies likely to cross the profitability threshold earlier than expected. with higher margins, some small educational reminders about profitability.
A necessary but not sufficient condition
Quite intuitively. being profitable, that is to say having more products than loads on repeated exercises is rather cool when the objective is to create value for the shareholder. It is necessary even, but not enough!
In our article on dividends. we had already talked at length about the value creation mechanism and the economic profitability of a business.
Mathematically. these companies verge becoming profitable this economic profitability can be rewritten to reveal two key components of the mechanism: profitability and productivity (or rotation of assets).
So to bring value to the conglomerate of providers of the company’s funds (creditors. shareholders), it must not only be profitable but also productive.
Decomposing the economic profitability of its competitors in this way. it allows in particular financial directors to identify the points on which their business can improve.
Then. for companies which enjoy sufficient economic profitability and which have not abused credit, it is entirely possible to go into debt at a reasonable cost to invest in economic assets, without diluting the shareholder, and therefore increasing its profitability provided that investments effectively make it possible to generate higher operating flows.
When an investor puts circles in a box. if his goal is to make his these companies verge becoming profitable pepettes grow, he should therefore constantly check that the company is productive, profitable and that it enjoys a positive lever effect.
It is obvious that all businesses. depending on the nature of their activity, are unable to enjoy these three levers in an equivalent manner. The distribution giants will mainly rely on the lever effect (the fact that the majority of their assessment is made up of tangible. liquid assets means that they can go into debt at low cost) because their margins are rikikis. For a mining. its profitability / productivity balance will be more or less dictated to it by the market and the accessibility of resources. While for a tech box with overpriced inggeeneurs but a scattered business. productivity will immediately appear excellent (because we do not take into account human capital in these companies verge becoming profitable a balance sheet) but competition with its competitors will be mainly on productivity because their debt capacity is limited by the intangibility of their balance sheet.
In short. what must especially remember is that If you are not profitable, you may be the most productive of Homos-Sapiens, you will not be able to create value for the shareholder.
It is therefore natural that the value of a box is ultrasensible to the projections of its margins.
Now let’s see how to identify these companies in stockscreener
The technique is mainly based on the use of 3 filters: the net margin for the current exercise. the growth of historic and projected BNA and the acceleration of revisions upwards BNA.
The objective is simple. we are looking for companies that are not profitable today, or that have just become, whose growth of BNA is substantial (we use our BNA growth rating – see these companies verge becoming profitable our video on zonebourse ratings) and for which analysts in charge of studying the file in the biggest banks in the world have recently tended to revise their profits estimates for the years to come.
We can also add a filter on the growth of turnover. but we take out the “recovery” companies of the analysis scope at that time since it is generally mature companies.
Finally. we sort again on the basis of BNA revisions, we display the VE/CA for information and we are interested in the financial health of the box: we look at the order of magnitude of the passive circulating vis-à-vis the exploitation flows to see how the company burns cash and we check the Current Ratio and its net debt situation to ensure that it is largely.
Here are the few results that we get in the USA, among them: Zscaler, a return to the these companies verge becoming profitable highest?
This article also exists in video format:
These companies verge becoming profitable
Further reading: ESG investment | An “s” for “security” – Japan: electoral setback projected for Prime Minister Ishiba – Meloni warns against a “trade war within the West” – Totalnergies: with a profit down by almost 30% and a net debt that climbs, Totalnergies is again sanctioned by the Stock Exchange – Global scholarships surf on increased hopes for decline in Fed levels.
